Cramer: Fannie, Freddie Takeover Changes the Game

Right now, at this moment, many people know that something good is going to come from this government takeover of Fannie (FNM Quote) and Freddie (FRE Quote), but they don't know how it relates to the market.

So, let me tell you how I see things unfolding. We know that our economy started rolling over because so much money -- trillions -- has been bet on house-price appreciation.

The wagering on American house-price appreciation has taken place in every venue and, in many cases, with gigantic leverage, magnifying a problem of historic proportions with a financial Armageddon quality we have not seen EVEN IN THE GREAT DEPRESSION. In other words, not since the Great Depression, but including the Great Depression. That's how important it was for houses to appreciate.

We are now in a double-digit decline of housing that has made most houses bought since 2005 worth less than their mortgages. House-price depreciation has been so relentless, particularly in Florida and California, believe it or not, two states that could bring the whole financial edifice down, that if it isn't stemmed then it's difficult to stop a severe recession, if not depression, given the abrupt slowdown of the rest of the world and our own skyrocketing unemployment.

The only hope to break the chain of despair and turn around the endless declines in home values to the point where you SHOULD walk away from a home with a mortgage larger than the value of your house, is to stop this house-price depreciation.

So far we have failed so badly in doing so that borrowers of even the highest quality are now defaulting. That's wrecking the bonds and derivatives and the insurers of the bonds and derivatives and anyone that is holding mortgage paper.

The Treasury's takeover of Fannie and Freddie can change that because once mortgage paper packaged by the government enterprises is federal government paper, then ANYTHING can be worked out with the borrowers, and the borrowers represent the lions' share of the troubled homeowners in the country who have not already defaulted.

The government can cut the mortgage payments, and it can extend the terms, say to 45 years. It can take any hit to keep you in your home, and the paper is still insured.

Put simply, there will be no reason to foreclose, and no reason to walk away. That will DRAMATICALLY reduce the amount of foreclosed homes coming to the market. It will dramatically reduce the amount of money people owe on their mortgages.